Before Supershakti Metaliks, there was Super Smelters Limited. Super smelters limited was operating through 3 units situated in Durgapur, Koderma and Jamuria. The management in all its wisdom then decided to demerge the 3 units and grow them independently with the requisite leadership to attain better profitability. As a result, the 1st unit in Durgapur was vested under Supershakti Metaliks in 2016 and our journey begins.

WHAT DO THEY DO?

The company sells semi-finished/finished steel products. They operate a Steel Melting Section with installed capacity of 1,35,000 MTPA to produce semi-finished products i.e. Billets and a Rolling Mill Section with installed capacity of 1,62,000 MTPA to produce Wire Rods, HB Wires, Binding Wires etc.. If you don’t know what this means, know that this is a very big plant involved in the production of steel products with a lot of capacity and plans to expand in the future.

POINT OF INTEREST

Induction furnace is used to make billets and it acts as a raw material for rolling mills which in turn produces the finished steel products i.e. HB Wires and Wire rods.

Also the percentages on utilised capacity for the rolling mill don't quite match with the actual values.

Their manufacturing activities are labor intensive and as on March 31 2018 they had about 376 employees on their payroll

INCREASING WORKING CAPITAL REQUIREMENTS

The company in line with their plans to increase capacity has registered that their working capital requirements are bound to rise in a big way. Here is what is expected to happen in the next year

1) Due to introduction of new products, revival of industry and increase in capacity, sales are expected to rise significantly

2) With this increase in sales, the company also expects its inventory holding periods to rise from 27 days to 69 days

3) And hence the working capital requirements are expected to increase from around 33 Crores to 105 crores

The company wants to invest about 23 Crores of its IPO funds in fueling its disproportionate increase in working capital requirement for the next year.

SO SHOULD YOU PAY?

Well the company’s arguments are simply that the top line has grown YoY since the demerger. The company’s revenue from operations has been increasing. From roughly 210 Crores (FY 16) to 260 crores (FY 17) to 350 crores (FY 18) the company has shown immense potential for growth.

However, profits have largely been underwhelming except for one interesting spike. During financial years, 2016 and 2017 the company made 71 lakhs and 58 lakhs in profits respectively and then during FY 2018 profits jump to 12 Crores in one sweeping move. Herein lies the story of Supershakti Metallics and we will try and see if this increase in profits is sustainable or a one-off phenomenon.

Here is how the company justified the recent spike in profits

1. Increase in Economic scale due to increase in capacity

Company's explanation

During the FY 2017-2018 we have enhanced our production capacity, due to which our production has increased and sale has significantly increased by ` 8,887.46 from ` 26,728.47 in FY 2016-17 to ` 35,615.93 in FY 2017-2018.

Our analysis

True, the company has in fact generated more revenue from operations. However, this revenue is calculated after deducting taxes/duties i.e. Net . The company paid about 32 Crores in duties during FY 2016-2017 and around 6 Crores in duties during FY 2017-2018. This has had a material impact on the net revenue they generated from operations.

Due to revival of steel and iron industry in the FY 17-18, prices of steel has increased due to which opening inventories have been valued at low price and closing stock of the current year have been valued at increased prices which results in increase of profit

Our analysis

When you value your closing stock at a higher price your cost of goods sold (COGS) reduces. Here is the formula. COGS = Beginning Inventory + Purchases during the period – Ending Inventory. When the value of Ending Inventory rises, COGS reduces and this helps in improving your profits

3. Decrease in the finance cost

Company's explanation

During the FY 2017-2018 the finance cost has also reduced as compared to last fiscal, Finance cost during the year decreased by ` 85.68 lakhs or 18.85%, from ` 454.66 lakhs in fiscal 2017 to ` 368.98 lakhs in fiscal 2018. The major factor for such decrease was due to decrease in Interest on Working Capital from Bank and Other Borrowing Cost.
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Our analysis

As we have already mentioned, the company’s working capital requirements are poised to increase in a big way next year. The company also plans to borrow about 62 Crores during FY 18-19 as opposed to 22 Crores during FY 17-18. Therefore, it is quite natural to assume that they will have to pay more interest and this could have an impact on their profit levels.

4. Decrease in Inventory levels

Company's explanation

During the FY 2017-2018 our inventory has also decreased as compared to last fiscal result of which has increased our profitability. Our inventory days in FY 2016-17 were 37 days which has been reduced to 27 days in FY 2017-18

Our analysis

We know the company’s inventory levels are bound to rise next year. According to company’s estimates, their holding days are expected to rise from 27 days to 69 days. So does it mean that this rise will impact profitability next year? Hmmmm!!!!

WHAT DOES THE FUTURE HOLD?

Well, it’s very hard to guess where the company is headed in the future. May be they will maintain said profit levels or maybe this was just a one off chance event. We don’t know, but what we do know is that the company’s asking price translates to a P/E of about 17 on a post issue basis. With the industry average hovering at about 15, the issue is fully priced.

We here at Finception, wish the company all the best in their future endeavor.

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